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Why Trade With China Doesn’t Work

May 09, 2012John Olen

Since 2001 — the year the U.S. entered the World Trade Organization (WTO) — our trade deficit with China has more than tripled. In that same time period, we have lost over 3 million manufacturing jobs; from 2001 to 2009, the U.S. lost 42,400 factories. This is not a coincidence. With cheap goods flooding our markets from overseas, demand for domestically manufactured items has dropped. Just as importantly, China’s emerging middle class seems more inclined to save than to spend money on American-made goods. The average Chinese worker saves 25 percent of their income; American workers save just 4 percent of theirs.

As with all of our free trade agreements, the American public was told that our free trade relationship with China would be beneficial, because increased exports would offset the losses from cheap imports coming into the country. China’s growing middle class was sold as a major market that could save American manufacturing. A decade later, this market has failed to develop, but America’s trade deficit with China is staggering. This is more evidence that we need to evaluate whether our trade agreements are truly beneficial to us or if they are blindly negotiated based on the idea that exports will save us.

We were told that as the Chinese earned money from manufacturing goods for export to America, their marketplace would begin to look more like our own. Chinese currency manipulation has been part of the problem in allowing U.S. manufacturers to succeed in China. By artificially devaluing their currency, the Chinese have been able to make American goods sold in China relatively more expensive. Meanwhile, their exports to the United States are essentially subsidized by the low value of the yuan. This, combined with the fact that the Chinese don’t appear to have the same voracious appetite for consumer goods that Americans do, has made the promises of increased exports ring hollow.

This trade imbalance has not been bad for all Americans; those who run multinational corporations that profit off of cheap foreign labor are still doing quite well. Those who hold stock in those companies can also cash in to some extent, but as middle class jobs continue to disappear there will be less and less Americans who can even afford to own stocks. This will further divide America between the haves and the have-nots, and the only way to stop it is to rethink our free trade agreements.